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Backbase - The ROI of Omni Channel - Whitepaper 2 PDF
Backbase - The ROI of Omni Channel - Whitepaper 2 PDF
The ROI of
omni-channel
digital banking
/1
Contents
Banks create value through the services they offer to per customer by the net interest margin to arrive at
companies and individual customers. The simplest the average interest income per customer. The implicit
way to think about growing revenues in banking is to assumption here is that when the bank gains customers,
add customers or to increase banks’ share-of-wallet it will convert the deposits of these customers into loans
with the customer. But, before we do that, let’s consider as effectively as it has done before. Finally, add the
what the individual retail customer is actually worth. average fee income per customer to arrive at the yearly
This really helps to put into perspective the cost savings revenue per customer. This yearly revenue value per
and revenue gains of a digital banking project: once you customer can be converted into the customer lifetime
know what a customer is worth you can think about how value (expressed in revenue) by dividing by the churn
many new customers a project can add per year. rate. The table 1 guides you through the calculations.
For our example bank of 650,000 retail customers the
The back-of-the-envelope method average customer yields about $890 in revenue per year.
To start simple, let’s consider a quick and easy way to In table 2 the customer value for the prototype bank
estimate what a customer is worth to the bank. Firstly, is calculated. Clearly, there are large differences. Wealth
divide customers’ deposits by the number of customers management banks generate over 10x as much revenue
the bank has. This gives the average deposits per from a single customer than retail banks, and for digital
customer, and such underlying data should be readily challengers the reverse is true.
available. Subsequently, multiply the average deposits
1_Calculation table for the back-of-the envelope method A more detailed approach of customer
value
Item Calculation Example Bank Source With a product-based estimate of customer value, The calculation is very straightforward. For each loan
A Number of customers 650,000 Customer we can generate even more insights. By considering product, the number of customers with that product is
the penetration, size, and spread of the various loan multiplied by the average product size and the spread
B Total deposit of customers 17,134,000,000 –
products in the bank we can estimate not only the value of the product. This gives you the revenues by product.
C Average deposits B/A 26,360 Customer of the customer, but also which products contribute From the resulting total revenue, the net interest income
most. This type of analysis highlights, as an example, per customer is calculated. The remaining calculations
D Net interest margin 2.5% Customer
how improvements in onboarding and origination for are similar to the earlier back-of-the-envelope method
E Average interest income CxD 659 mortgages will be more impactful than for unsecured 3.
personal loans.
F Average fee income 230 Customer
/ 10
G Customer value E+F 889 –
3_Calculation table for detailed approach / 11
Total deposit of customers 85,000,000,000 12,000,000,000 684,000,000 7,000,000,000 ∑ (A x B1n x B2n x B3n) 428,461,313 Customer
1-n
Average deposits 18,889 600,000 4,560 10,000 C Average NII per customer B/A 659 –
Net interest margin 3.2% 2.1% 1.3% 2.5% D Fee income ratio 35% Customer
Average interest income 604 12,600 59 250 E Fee income per customer CxD 231 –
Average fee income 272 11,340 9 100 F Total income per customer C+E 890 –
Customer lifetime value 14,607 798,000 974 11,667 I Weighted average value 1 product 1,401.13 –
The value of
onboarding
and origination
/ 12 / 13
A End of year ‘net new’ customers 52,000 Cost of onboarding End of year ‘net new’ customers 360,000 1,000 54,000 42,000
C Onboarded customers before churn A / (1 - B) 57,778 – Onboarded customers before churn 382,979 1,031 58,065 43,299
D Typical onboarding leakage 50% Industry average Typical onboarding leakage 50% 50% 20% 50%
E Customers who started onboarding C / (1 - D) 115,556 – Customers who started onboarding 765,957 2,062 72,581 86,598
F 1% improvement on leakage D - 1% 49% Assumption 1% improvement on leakage 49% 49% 19% 49%
G Onboarded customers before churn E x (1 - F) 58,993 – Onboarded customers before churn 390,638 1,052 58,790 44,165
/ 14 / 15
I End of the year ‘net new’ customers G x (1 - H) 53,629 – End of the year ‘net new’ customers 371,106 1,031 55,263 43,282
K Customer value per year 890 Value of customer Customer value per year 876 23,940 68 350
L Revenue increase per year JxK 1,449,931 – Revenue increase per year 9,734,128 730,540 86,095 448,577
Taking all of this into account it’s easy to see why What would be the value of a single percentage
digital onboarding can increase the conversion rate point improvement in the onboarding process? In
of onboarding processes. Let’s consider the value of a terms of customers if would be 1,600 customers
marginal improvement in onboarding: our example bank (116,000 x (1 - 49%) x (1 - 9%)). With a yearly revenue of Why do new customers churn at higher rates?
needs to successfully onboard 52,000 customers to USD 890 per customer this represents USD 1.45M per
achieve a growth of 3%. This means that at the end of year… for every percent of improvement! 45 Your newest customers are your least loyal customers. Churn is not uniform across all cohorts. The customers
the year, there must be 52,000 people left at the bottom who have been with your bank for longer are more loyal. There are a couple of reasons for this. Customers
of the onboarding funnel. How many people entered at Typically, a modern industry leading digital banking with longer tenure tend to have more products with you and so they are less inclined to leave. Leaving
the top of the funnel to start the onboarding process, implementation does not just improve the conversion would mean changing a lot of financial arrangements at once. Additionally, customers who have longer
and what is the drop-off? by 1%, but in the range of 10 - 15% in year 1. The tenure are familiar with the products and procedures of the bank. They don’t need to spend a lot of mental
improvements are attributable to a better customer energy getting things done. This affords a level of convenience.
Typically, digital onboarding flows have a drop-off interface, faster performance, retargeting of incompletely
of 50% [1]. On top of that new customers churn at a onboarded customers, and of course straight-through- Conversely, new customers are completely unfamiliar with the basics of your bank and have to figure this
much higher rate than customers with longer tenure, processing. out as they go along. On top of that new customers have often just given up on their former bank. Whatever
at 10-20% over the first year [See page 19: Why do new the reason was that they left, they are, ipso facto, disloyal customers who need to be won over.
customers churn at higher rates?]. This means that to
arrive at 52,000 new customers there needs to be an
inflow in the onboarding process of 116,000 customers
(116,000 x (1 - 50%) x (1 - 10%)).
The value of higher engagement
Customer acquisition is not complete once people sign- products on average and it becomes clear that digital
up for a checking account. On the contrary, it is just the engagement promotes share-of-wallet.6
start. Customers only become profitable once they buy
additional products from the bank, such as mortgages, How digitally engaged are your customers? How much Attrition and Hidden Defection hurt customer value
personal loans and credit cards. Banks compete with room for improvement is there? Let’s make an estimate
each other to become the primary banking relationship for our example bank. National statistics for the US All banks work hard to grow their customer numbers. When growth levels disappoint, the underlying causes
for customers. The checking account is merely a foot in suggest that at least 75% of customers have access are not always apparent. One of the more visible drivers is increased attrition: when customers leave the
the door. to the internet, but only 45% of customers use online bank to begin a primary banking relationship elsewhere alarm bells should go off. However, there is also
banking. This represents a gap of at least 30%. That a second form of attrition, which is more insidious: hidden defection. When a bank’s relationship with
On average consumers have about 5 to 7 banking gap of 30% represents 195,000 customers. If we could its customers isn’t strong enough, competition creeps in. Banks don’t necessarily lose these customers
products, but not all these products are bought from increase the digital engagement of 5% of this group completely, but they will not buy a second, third or fourth product from the bank. Instead they move to
a single financial institution (that is rarely the case). and sell one additional product via digital channels, competing institutions and the primary bank loses an opportunity to grow share of wallet.
/ 16 / 17
However, the more engaged customers are with their what revenue would this represent? One additional
bank, the more likely it is that they will have more product has an estimated value of $1,400 per year.
products from that bank. In other words, engagement Selling one additional product to 9,750 customers yields Account Card Mortgage Loan
correlates with share-of-wallet. $13.6M.78
Customer 1
A large-scale questionnaire from The Financial Brand Digital banking doesn’t only increase the likelihood
[2] illustrates this for digital engagement. Customers that people will sign-up for an account with your bank.
Customer 2
who are highly digitally engaged with their bank have Increased engagement due to digital banking also
more than 4 products with their bank. Compare this to promotes share-of- wallet.
the digitally disengaged customers who have only 3
Customer 3
Customer 4
6_Average number of products with main bank by level of digital engagement
Attrition Hidden defection
Highly digitally engaged 4.4
Clients lost due to attrition Product purchases lost due to hidden defection
G Value of 1 additional product Weighted average 1,401 Value of customers Conversely, when banks haven’t been able to keep pace with innovation they run the risk of becoming
/ 18 / 19
irrelevant and losing the customer relationship. If you are not present in the digital world where your
H Revenue uplift FxG 13,661,062
customer chooses to do business, you will not sell. The worst-case scenario is that customers consider the
bank a place that holds his or her money, but just for now.
Value of 1 additional product 1,285 26,783 126 531 my money for me.”
Strength of bank’s
Revenue uplift 43,362,244 24,104,306 – 6,509,651
digital presence
The costs of onboarding q_Calculation table for cost savings from digital onboarding processes
Customer onboarding remains the most important Furthermore, fully digital banks that have neither a front
customer facing activity, regardless whether you are office nor a back office have almost negligible costs Item Calculation Example Bank Source
a brick-and-mortar bank or a fully digital bank. You when it comes to onboarding.9 A Number of customers with a current account 650,000 Customer
cannot grow deposits or write loans without reaching
B Percent churn per year 5% Industry average
new customers. Every bank in the world knows this, For banks with a branch network the first step to save
and as a result a large portion of operational expenses costs is to make onboarding independent from the C Percent growth per year (net) 3% Customer
is dedicated to branch offices, back office processes, branch, or any other physical interaction. What could
D Percent customers to onboard B+C 8% –
IT, cards, direct mail, checkbooks, marketing, and other banks save if they would reach the level of cost of a
standard expenses related to onboarding. McKinsey typical direct bank? Let’s do the math: If we consider a E Customers to onboard DxA 52,000 –
estimates that these costs add up to $300 per customer medium-sized bank with 650,000 customers that has
F Cost of onboarding - traditional 300 McKinsey
for customers who open a new checking account [3]. a net growth in customers of 3% per year that growth
alone represents 19,500 new customers. Additionally, G Cost of onboarding - direct 100 McKinsey
/ 20 / 21
For a lot of banks this is an investment that will only pay replacing yearly churn of 5% adds another 32,500
H Difference in onboarding cost F-G 200 –
off after new customers start generating revenue by customers to onboard. In total this makes 52,000
taking a loan or generating enough fee income on, e.g., a customers. The onboarding for these customers would I Cost savings HxE 10,400,000 –
new credit card. Customers who are not buying additional traditionally cost $300 per person, but would be reduced
J Discount for time-to-value year 1 30% Backbase analysis
products from the bank remain unprofitable. This means to $100 per person. The resulting cost savings of $200
that the bank needs to reduce onboarding costs in order per person for 52,000 new customers amounts to K Value I x (1 - J) 7,280,000 –
to make a profit on more of their customers (banks that $10.4M per year.
tried to increase fees instead dealt with severe criticism
from customers). Even if adoption of digital onboarding is not immediate,
the cost savings are very attractive. One look at the w_Calculation table for cost savings from digital onboarding processes for prototype banks
One way of reducing onboarding costs is to take away income statement of a direct or fully digital bank
the need for a branch visit and digitize onboarding confirms this of course. In fact, we are only expressing Item NE S&H EZ GS
completely. This model was first popularized by direct in numbers what most bankers already know: digital Number of customers with a current account 4,500,000 20,000 – 700,000
banks such as ING Direct. The onboarding cost for onboarding is a big value driver. To see how your costs
Percent churn per year 6% 3% – 3%
these direct banks is estimated by McKinsey at $100 could be reduced, please take a look at the calculation
per customer. A $200 per customer cost saving! tables q and w. Percent growth per year (net) 2% 2% – 3%
9_Onboarding costs estimated by bank’s business model Cost of onboarding - traditional 300 300 – 300
e_The value of a 6-month delay in deployment of the example bank results in a loss of $5.4M in revenue.
*Revenue per customer $890/year
Customers
Customers
Origination
Low value products
e.g. Personal loan Gain 16k customers in year 1
15,000
10,000 $7.2M
Customers
Origination 5,000
High value products
e.g. Mortgage
on ths
dela
y
$1.8M
6m
0 6 12 Months
When you can make a similar calculation for your business cases the value of time-to-market is not taken
own bank, it is likely that you will arrive at a similarly into account. This is a real shame, because a lot of value
impressive number. Project delays have a big impact is lost because of it.t
not just on cost, but also on revenue. In a lot of internal
A Number of customers gained due to 10% onboarding improvement 16,293 Value of conservation
/ 24 / 25
B Customer value for 12 months 890 Value of customer
Number of customers gained due to 10% onboarding improvement 111,064 305 12,629 12,816
Revenue gained starting on time (surface area triangle) 48,670,638 3,652,701 430,473 2,242,887
Number of customers gained due to 10% onboarding improvement 55,532 153 6,315 6,408
Revenue gained at 6 month delay (surface area triangle) 12,167,660 913,175 107,618 560,722
/ 26 / 27
– $ 98.40
i_Calculation of customer interactions in the US and the Netherlands for prototype banks
Item Calculation Example Bank Source Item NE S&H EZ GS
B Total cost to serve US customers 148 Accenture, Bb analysis Total cost to serve US customer 148 125 – 148
C Total cost to serve NL customers 49 Accenture, Bb analysis Total cost to serve NL customer 49 42 – 49
D Cost savings potential per customer B–C 98 – Cost savings potential per customer 98 84 – 98
E Total cost savings potential AxD 63,960,000 – Total cost savings potential 442,800,000 1,672,800 – 68,880,000
G Year 1 cost savings E/F 6,396,000 – Year 1 cost savings 63,257,143 334,560 – 6,888,000
H Attribution to digital banking platform 30% Estimate Attribution to digital banking platform 30% 30% – 30%
I Year 1 attributable savings GxH 1,918,800 Year 1 attributable savings 18,977,143 100,368 n.a. 2,066,400
The costs of codebase maintenance
So far, many of the value drivers for digital banking have information and (largely) need to facilitate the same What can be done to reduce this expenditure? This is rewrite the relevant code for each channel. On top of
focused on creating value at the customer facing side of functionalities across a bank’s products. An example where the digital banking platform comes in. Instead of that, the platform reuses code across channels and
the business. There are however, large gains to be made of such necessary information would be the products a updating each channel separately, it’s possible to just connects each channel to create a single omni-channel
in the IT department too. customer has bought, the accounts they have, or their update the platform. This removes the need to constantly experience. [See page 27: Platforms are paramount]
balances and transaction histories. In addition, most
Many banks find themselves hostage to a highly channels need to know the bank’s contact history with
complex IT landscape that is difficult to control. As a a client, alongside other information.
result, the costs of IT staff are ballooning. Even though
banks have a lot of IT staff, most of their effort goes into Whenever a change to the front-end is needed, for
keeping current systems running, rather than innovating. example to respond to new regulations, all channels Platforms are paramount
Often, a skill gap prevents banks from making in-house need to be updated. This is inefficient in many ways.
improvements. The largest contributor to the increasing Code duplication leads to higher development costs, Just consider the number of possible connections the IT department must build between disconnected
/ 30 / 31
maintenance costs, however, is complexity. highly complex testing scenarios, and it lengthens channels. The number of paths between channels shows geometric growth as the number of channels rises.
the release cycle significantly. All of this reduces the If you have ever wondered why the IT department has a hard time keeping up, this is a key reason. Platforms
As a result of the gradual introduction of new channels in resources available for innovation and slows banks are needed to reduce complexity and enable consistent customer journeys.
banking, banks have acquired independent disconnected down: most IT staff are tied up in projects that simply
channels, each with its own equally disconnected code. ‘keep the lights on’.
A typical retail bank easily operates up to 8 separate
channels. For instance: Branch, Call Center, Advisory, Changes that have an impact on the channels are not as
ATM, Internet Banking, Mobile Banking, Public Website, rare as one might think either. The list o summarizes
and one or more product or segment based online some recent or upcoming banking trends and events, all
platforms. All these channels require access to customer of which warrant changes.
Political — Brexit
— New or reinstated sanctions
Regulatory — GDPR
— PSD2
In order to offer customers a seamless omni-channel
Technical — Channel migration
— Introduction of APIs
experience, switching between different channels
— Security threats online should be easy and fully functional. This is almost
— Move to cloud computing impossible to achieve without the use of a platform to
— New AI features such as chatbots centralize customers’ data and shared functionalities.
— Blockchain
Omni-channel platform
Product introductions — New payment forms such as Zelle or Paypal.
— New lending products.
Item NE S&H EZ GS
Tailored Real-time Digital Financial Front-office Getting set for the new industry When all systems talk to each other, tailored advice and
Advice Support Sales Insight Empowerment Google owns information, Amazon owns ecommerce, real-time support are instantly available to customers.
Facebook owns communication - these players Frontline staff are freed from slow, paper-based
dominate in their areas. Now it’s time for banks to processes and empowered to deliver excellent service,
own finance. They must reinvent themselves and go with the right information at their fingertips. The user
beyond a digital transformation to achieving a business experience works, from onboarding to upselling, and
transformation. Banks that work the digital-first banking this drives digital sales. Enhanced financial insights help
platform properly will empower themselves to do things customers to manage their financial lives and banks to
The Digital-First Banking Platform 10 times better. That’s how they will hold onto their strategize. The digital banking platform connects all the
customers at a time when the threat of attrition is bigger dots to deliver for the end customer and ensure the bank
than ever. can compete into the future.
01. User Experience Management
A robust, agile digital-first banking platform will connect 01. User experience management. Behind every great
and empower all parts of the organization to optimize user experience is a smooth integration with back-end
02. Digital Banking Capabilities
omni-channel customer journeys. It works alongside services. When customer data can be quickly sourced,
legacy systems, connecting, aligning and informing to frontline staff are empowered with real-time, accurate
03. Identity & Access Management / Entitlements support staff and customers. data, and customers enjoy superior self-service
capabilities.
04. Process Digitization Capabilities Digital marketing professionals should be able to tailor
the end-user’s experience, without the need to call on
IT for every change. Backbase offers a range of user-
05. Cloud Deployment
friendly tools that empower digital marketers to edit
s_ strong digital banking platform is a content and navigation, add widgets, update the mobile
function of well-managed user experiences,
app, run digital marketing campaigns across multiple
backed by digital capabilities, security, smart
processes and cloud deployment. channels, and more.
Source: Backbase
A modular, flexible orchestration layer will connect and Access to permitted functions and data can be limited The Backbase platform supports both traditional app Driving value with the digital banking
streamline existing core banking and back-end systems and authentication can be stepped-up in high-risk servers and new native cloud deployment models, platform
for frictionless, personalized, omni-channel experiences. situations. Users can fully customize to create their enabling banks to safely make the transition from With the right platform in place, a bank can create superb
This empowers banks to deliver optimal, relevant own views, and select preferred accounts or business a classic deployment to a native cloud deployment, customer experiences, react swiftly to market changes
customer journeys, reduce time to market, and ease the performance metrics. Payments can be authorized on- without re-engineering. Backbase has done the hard and capitalize on unexpected marketing opportunities.
burden on the IT department. the-go and mobile alerts and access to outstanding work of abstracting the platform capabilities from the All of this begins with noting the pain points for the
approval requests are also available. various cloud deployment models, The Backbase Cloud customer and solving these with the digital banking
02. Digital banking capabilities. To compete in a digital is supported by an ecosystem of certified technology platform. A keen focus on each of the platform’s four
world, banks must offer smart digital products and 04. Process digitization capabilities. Smart online and infrastructure providers that facilitate service pillars and a strong digital-first approach will move
services that are easily accessible over every device. forms and logical processes are key to efficient customer provision across multiple countries, all with a proven banks from the role of follower to formidable competitor
Banks need a platform that supports their efforts to stay journeys. When they don’t work properly, abandonment track record in financial services. and sustain their business into the future.
competitive by providing innovative digital excellence. increases, impacting the success of online initiatives.
/ 36
Smart forms and dynamic process management The Backbase Open Banking Marketplace / 37
Backbase is the digital banking platform that empowers increase efficiency and remove manual, paper-based One organization could not be all things to everyone
banks with superior Banking-as-a-Platform capabilities. tasks - making life easier for both customers and before - but that’s changing, banks can add to their
Built on a state-of-the-art microservices architecture employees. products and services by connecting to the open banking
and with API-based banking capabilities, Backbase ecosystem. By adding incremental value from the open
complements existing core banking systems. Modular Backbase Digital Forms simplify and streamline all marketplace, they can put all of the pieces together
architecture enables easy customization, while both customer dialogs across multiple channels, while seamless solutions that have magnetism, something
classic and cloud deployment are facilitated. onboarding or self-service dialogs integrate with internal customers want to be a part of.
systems for straight-through processing (STP). Banks
This leading omni-channel digital banking platform can actively streamline their online customer dialogs The Backbase Open Banking Marketplace is the perfect
helps financial institutions create, manage, and optimize and manage their self-service and customer enrolment platform to establish mutually beneficial partnerships
superior customer journeys, on any device and over processes. that drive innovation. It enables financial institutions
multiple channels. Functionality can be tailored for and fintechs to connect to the Backbase Digital Banking
seamless, omni-channel customer experiences that Backbase automates daily tasks, connecting people Platform. The Backbase Digital Banking Platform is an
normally would not be available directly from the core and information to handle each case quickly and open API-based platform, which allows for any third-
banking or back-end systems. accurately. Built-in mobile and social capabilities party fintech capability to be easily integrated and
simplify collaboration via any device or channel, and leveraged into seamless digital customer journeys
03. Identity and access management. Identity and communication with legacy systems is also possible via across all channels.
access management is key to ensuring access security configurable connectors.
in today’s open banking marketplace. A sophisticated Backbase Open Banking Marketplace offers the perfect
entitlements solution makes this easy, by automating 05. Cloud deployment. Cloud deployment powers fintech solution to significantly boost speed and
and managing the process of granting access rights to constant feature or functionality updates, without efficiency in any go-to-market strategy.
trusted users. any impact on day-to-day business. New code can
be deployed thousands of times per month, and fast.
Backbase offers a sophisticated entitlements solution Development teams can bring new capabilities to
that lets a bank integrate the existing entitlements market via a highly automated platform that scales with
system, or leverage Backbase Entitlements to tailor the business. Security can also be automated, making
access levels and permissions to view, create or approve it easier to keep pace with industry regulations and
transactions. Various password combinations, tokens, compliance standards.
Integrated Multi-Factor-Authentication (MFA) and alerts
strengthen and simplify access control.
Notes
[1] McKinsey
McKinseyGlobal Banking Annual Review (2016)
https://www.mckinsey.com/industries/financial-
services/our-insights/a-brave-new-world-for-global-
banking
[3] Mckinsey
/ 38 The Future of Face-to-Face (2012) / 39
https://www.mckinsey.com/~/media/mckinsey/
dotcom/client_service/financial%20services/
latest%20thinking/consumer%20and%20small%20
business%20banking/the_future_of_face_to_face_
how_to_make_the_transformation_a_reality.ashx
[4] Accenture
Banking Customer 2020 (2015)
https://bankingblog.accenture.com/wp-content/
uploads/2015/08/P1200614_Infografik_Banking_
Customer.pdf
[5] Bain
Customer Loyalty in Retail Banking – Global Edition
https://www.bain.com/insights/customer-loyalty-
in-retail-banking-2012/ 2012 (2012)https://bit.
ly/2nsPiou
Backbase Named a Backbase Named a Leader
Leader in the Forrester in the Ovum Decision
About Backbase
Wave™ for Omni-Channel Matrix for digital channel Backbase is a fast growing fintech software provider More than 100 large financials around the world have
Digital Banking banking platforms that empowers financial institutions to accelerate their standardized on the Backbase platform to streamline
digital transformation and effectively compete in a their digital self-service and online sales operations
10 Leader Challenger Follower
digital-first world. across all digital touchpoints. Our customer base
Bubble size represents market impact
Note: Scale has been adjusted to improve legibility
Backbase
includes HSBC, ABN AMRO,CheBanca!, Credit Suisse,